Regulating Innovation with Uncertain Quality: Information, Risk, and Access in Medical Devices

Matthew Grennan, Health Care Management, The Wharton School, and Robert Town, The University of Texas-Austin

American Economic Review, Vol. 110, No. 1, January 2020

Abstract: We study the impact of regulating product entry and quality information requirements on an oligopoly equilibrium and consumer welfare. Product testing can reduce consumer uncertainty, but also increase entry costs and delay entry. Using variation between EU and US medical device regulations, we document patterns consistent with valuable learning from more stringent U.S. requirements. To derive welfare implications, we pair the data with a model of supply, demand, and testing regulation. U.S. policy is indistinguishable from the policy that maximizes total surplus in our estimated model, while the EU could benefit from more testing. “Post-market surveillance” could further increase surplus.

Read the full paper here.